The Indian equity markets have had a terrible last month as they struggled to react to the developing spread of the coronavirus and the resultant global shutdown. Even after the sell-off there remains a high degree of uncertainty in terms of how the virus scenario may unfold as this is a true black swan event and there are no real guides available as reference points to the markets.
But from a markets perspective, the important thing to note is that regardless of the path that the virus takes, ultimately it is more of a one-off disruption that the economy will come out of – and so when we take a longer term view – say 3-5 years, we don’t expect any lasting damage to the economy or the markets from the current events.
So how should existing investors – especially SIP investors that have been regularly allocating to the markets and likely find themselves deep in losses – approach this environment? It’s only fair that such a sudden change in fortune combined with negative media headlines cause people to question their investment decisions. However, we suggest that any sudden or knee jerk reaction at this time should be avoided and instead investors should take a step back to see how things may play out going forward to help them take a considered call.
And to help us do that let’s turn to market history.
How have SIP allocations behaved In previous crisis?
We studied the Indian equity markets for the last 20 years – i.e. 2000 to 2020 to see how SIP investors have fared in normal environments and how that experience changes after a sharp market sell-off. To keep things simple, we have assumed investments into the Nifty 50 index. We computed daily rolling returns of 3 years, 5 years and 7 year monthly SIPs over the 20-year period( Graph A)
Then we identified SIP returns for the same tenors immediately after a 25% fall in the markets.(Graph B)
Past performance may or may not be sustained in the future. The analysis is done to explain benefits of long term investment and SIP performance is basis monthly hypothetical SIP done on the NIFTY 50 Index. All figures XIRR. The returns do not reflect actual performance or expected performance of schemes of Axis Mutual Fund.
Average returns in the markets have broadly been in the 13-17% range as can be seen above. However, what needs to be noted is the uncertainty around the averages that can come in the markets due to sharp up and downs. The minimum return during this time could have been negative – that is losses – for the SIPs. However interestingly as the SIP tenures get longer the losses have become lesser till for the 7-year tenure the minimum returns are also positive. (Past performance may or may not be sustained in the future. The analysis reflects the average SIP performance of a hypothetical SIP done monthly on the NIFTY 50 Index after each 25% fall in the index. All figures XIRR. The returns do not reflect actual performance or expected performance of schemes of Axis Mutual Fund.
After a sell-off however things become really interesting. What we see is that investors who start SIP from these levels see dramatically better average returns compared to the investors in scenario 1 above. And that improvement is sustained over very long periods as well.
While the above analysis is for new SIPs, existing investors can also benefit from these trends through three important steps:
Let the existing SIPs continue – essentially any incremental instalment from an existing SIP will work exactly similar to a new SIP and hence get the same benefits.
Do not redeem accumulated units from previous instalments – Market prices change daily. The only price that impacts investors is their entry and exit price. Focus on the long term potential of the markets.
Consider topping up or creating new SIPs – If cash-flows permit, sell-offs provide a fantastic time to take advantage of lower market valuations. Unfortunately, equity markets are volatile and there are a number of periods when we have seen market fall by 25% or more – That’s a quarter of its value lost in just a few months! At the same time, market corrections have tended to be short and sharp and ultimately the markets have bounced back – to the benefit of investors that did not panic and remained true to their investment objectives.
So what we are seeing in the equity markets in terms of the sell-off is not something new (even if the reason for the fall has changed) and investors should not allow these events to sabotage their long term investment journey. We are confident that the markets will normalise over the medium to long term.
SIPs provide the perfect way of investing in such tough market environments because even if the uncertainty lasts a few more months, the regular allocations can help investors average out their entry costs.
(The writer is Head – Equity, Axis AMC)